How to trade options like a pro using ready-made strategies
Ready-made option strategies are pre-defined combinations of options that can be used to achieve specific investment goals. In this blog, we will cover the basics of options trading, the different types of ready-made strategies, and how to choose the right option strategy for achieving your trading goals.
There are several ready-made options strategies that come handy when the vast array of trading choices feels overwhelming. They are simple to apply and can save you time and hassle while picking and placing your trades. Let us understand them in detail to help you unlock maximum profit.
What are ready-made options strategies?
Ready-made options strategies are like curated meal combos for the financial market. Instead of having to figure out each trading move, these strategies are pre-packaged plans designed by experts. They combine different trading options in a way that aims to either maximise your profits or minimise potential risks, depending on the market conditions and your investment goals. Let us look at the various types of ready-made strategies and the benefits they offer briefly before learning how to trade with them.
Types of ready-made option strategies
The stock market offers a variety of strategies tailored to specific market outlooks. Some of the most used ready-made option strategies are listed below:
Bull call spread - Traders buy and sell call options with the same expiration date but different prices
Covered call - Traders own the stock and then sell a call option on it.
Bear put spread - This strategy involves buying a higher-priced put option and selling a lower-priced one with the same expiration date.
Protective put - Think of this as an insurance policy for your stock. Traders buy a put option for a stock they already own. If the stock's price dips, the put option can help offset the loss.
Long straddle - Here, traders buy both a call and a put option at the same price and expiration date
Iron condor - This strategy combines two spreads: traders sell a lower-priced put, buy an even lower-priced put, sell a higher-priced call, and buy an even higher-priced call.
Long put - Traders buy a put option when they expect a stock's price to fall.
Short straddle - In this strategy, traders sell both a call and a put option at the same price and expiration date. It's ideal when expecting a stock to remain steady.
Benefits of ready-made options strategies?
Here's some key benefits of ready-made strategies:
- Saves time and effort: A ready-made strategy saves you the effort of crafting a trading plan from scratch.
- Expert-designed: These strategies are crafted by professionals who understand market nuances and are tried and tested over time to generate results.
- Tailored for different market views: Whether you're optimistic about the market (bullish) or a bit wary (bearish), there's a strategy designed for every perspective.
- Risk management: Some of us prefer a safer, more conservative approach, while others might be willing to take on a bit more risk for potentially higher returns. Ready-made strategies cater to these varied risk appetites.
- Adaptable: Many ready-made strategies offer a degree of flexibility, allowing you to adjust choices based on changing market conditions.
How to place a trade using a ready-made option strategy
Here are the key steps involved in placing a trade using a ready-made option strategy:
Step 1: Choose your platform
Start by selecting a platform that offers pre-curated option strategies. Many online brokerage firms provide these strategies, accessible via their apps or websites.
Step 2: Predict the market direction
Determine where you think the market is headed: bullish, bearish, or sideways. Then, decide on the expiry date for your trade. Based on your predictions, you'll get several ready-made strategies tailored to your market outlook. And remember, you have the flexibility to toggle between high-risk and low-risk strategies, depending on how adventurous you're feeling.
Step 3: Select your strategy
From the list, pick the strategy that resonates with you. Each strategy comes with detailed insights like the probability of profit, potential profit and loss, required funds, and even a handy pay-off graph. If you're curious about the mechanics of a particular strategy, there's usually a 'Learn how this strategy works' link to guide you.
Step 4: Define your trade
Once you've settled on a strategy, decide on the number of lots you wish to trade. Adjusting the quantity will update essential metrics like funds needed, potential profit and loss, and the break-even point. If you're feeling a bit more hands-on, you even have the option to tweak the strike prices of the options to customise your strategy further.
Step 5: Place your order
With everything set, click on the 'Place Order' button. Your order gets processed as a multi-leg order, ensuring each leg of the strategy finds the best bid-ask prices. After placing the order, you can easily monitor its status and view your positions either on the app or website.
Wrapping up: Points to remember
Ready-made option strategies are ready-to-use combinations of options that you can trade in different situations, whether the market is going up, down, or sideways. There are many different option strategies available, and the best one for you will depend on your investment goals, risk tolerance, and the underlying asset. However, as always, understand that options are leveraged instruments, which means that you need to be aware of the risks. Understanding the risks involved will empower you to manage your risks and maximise your profits with ready-made options strategies.